Higher Minimum Wage Is Imperfect Idea Whose Time Has Come

Feb. 25 (Bloomberg) -- U.S. President Barack Obama is
seeking to resurrect an idea that he set aside during his first
term: Raise the minimum wage to help lift working families out
of poverty. The proposal, which would take the minimum to $9 an
hour from the current $7.25, is far from ideal. Still, it’s the
right thing to do.

A better way to keep people working and out of poverty
would be to expand the earned income tax credit, a program that
makes direct payments to low-wage workers through the income-tax
system. The tax credit for a single working mother earning
$20,000 a year would be $4,618, for instance.

Both the minimum wage and the tax credit subsidize low-wage
labor. The difference between the two is that the minimum wage
puts the cost of the subsidy on employers, whereas the EITC puts
it on taxpayers. There lies the main advantage of the EITC and,
in the current political climate, the main defect. Because it
doesn’t burden employers, the EITC may be safer when it comes to
preserving jobs. Because it doesn’t burden employers, it has to
burden somebody else.

One argument popular among opponents of raising the minimum
wage is that higher labor costs will force employers to make do
with fewer workers. They exaggerate the danger. Certainly, too
big an increase -- imagine $20 an hour, rather than $9 -- would
put people out of work. The preponderance of recent economic
research, however, suggests that an increase as small as the one
the president proposes would have little or no effect on
employment.

Low Wage

Also bear in mind how low the U.S. minimum wage currently
is by international standards. In the U.S. in 2011, the annual
earnings of a minimum-wage earner -- at about $15,000 -- stood
at just 38 percent of the median worker’s earnings, according to
the Organization for Economic Cooperation and Development. In
the 25 other OECD countries for which data were available, the
average minimum-to-median ratio was 49 percent.

The stronger argument against a minimum-wage increase is
that it’s badly targeted. In 2007, the Congressional Budget
Office estimated that only about $1 of each $7 in higher wages
would reach workers in poor families. This is because most
minimum-wage earners are from somewhat higher-income households
-- think teenagers and college students with jobs at bookstores
and coffee shops. The positive effect could be further eroded by
inflation if businesses raise prices to offset the cost of
higher wages.

By contrast, the same CBO report found that, with a well-tailored expansion of the EITC, more than $1 of every $2 in tax
credits would go to workers in poor families. Increasing the
credit for workers without children, for example, would improve
incentives to enter and stay in the workforce.

If all that is true, why don’t we simply advocate an
expanded EITC? Actually, we do -- but we’re under no illusions
about its prospects in the current political climate. Any
measure that increases the budget deficit has little chance of
succeeding, regardless of how desirable it may be. Raising the
minimum wage won’t be much easier, yet it’s in the realm of the
possible.

Whatever happens on the minimum wage, Congress and the
administration should confront the problem of declining real
wages in more far-reaching ways. The recession and the long,
slow recovery have had a uniquely adverse effect on wage
earners, especially the working poor.

Average hourly compensation has fallen in inflation-adjusted terms since the economy hit bottom in mid-2009,
something that has never happened in any recovery on record,
going back to 1947 (see chart). Pay has declined even as workers
have boosted output per hour by about 6 percent.

Rising Inequality

The causes of this trend aren’t clear, but the consequences
are indisputable: rising inequality and stagnant or falling
living standards for most Americans.

Faster growth must be part of the answer. As Obama has
emphasized, the U.S. needs to make its workforce more employable
by raising the performance of its high schools. It must pay
fresh attention to vocational training for students who won’t go
on to four-year colleges and for workers switching jobs. It must
get a grip on health-care costs -- one of the forces driving the
wedge between rising productivity and sluggish wages.

All this needs attending to and will take years. The
problem of the working poor is too pressing to wait. Obama’s
plan for the minimum wage will help at little or no cost. We
support it.